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Apr 16, 2014

Vote-counting formulas: at odds with shareholder engagement?

Proposals filed by Investor Voice and Walden Asset Management are seeking reviews of or amendments to company bylaws as to how proxy votes are counted

For all the heightened attention companies are giving to shareholder engagement, it's curious that more than half the firms in the Russell 1000 Index continue to disadvantage shareholder proposals in the formulas they use when counting proxy votes.

That's one of the conclusions of GMI Ratings, which CalPERS commissioned last fall to study vote-counting practices. In a report, Vote Calculation Methodologies, GMI reports that 52 percent of S&P 500 and Russell 1000 companies count not only 'for' and 'against' votes for proposals but also abstentions, thus raising the threshold proposals need to reach in order to qualify for resubmission the following year.

Seattle-based Investor Voice, which describes itself as a social purpose corporation representing individuals and institutions that wish to be active with the companies they invest in, has filed nearly 20 shareholder proposals this year at companies such as FedEx and ConAgra Foods, asking for a uniform approach to calculating support and opposition levels for both management and shareholder resolutions, based on a simple majority of 'for' and 'against' votes.

'When a voter marks the abstain box [beside a proposal], he/she does so having read through the proxy' and having made a conscious choice not to check the first box, which indicates agreement with management, says Bruce Herbert, chief executive of Investor Voice. 'Understanding the abstaining voter's intent is not a straightforward proposition,' which means it's not appropriate for companies to treat their votes universally as being allied with management against shareholder proposals.
Equally disturbing to Herbert is that some companies use different vote-counting formulas in different places in a proxy, which he finds very confusing. And as if counting abstentions weren't bad enough, a handful of companies go farther by also counting broker non-votes, which the SEC has ruled should only be counted to reach a quorum at an annual shareholder meeting or for routine matters such as approving an auditor.

On April 8, Timothy Smith, director of ESG shareholder engagement at Walden Asset Management in Boston, sent a letter to Margaret Foran, chair of the board governance committee at Occidental Petroleum, requesting the company review its bylaws, which allow counting broker non-votes. His letter stated: 'We believe this is a questionable governance practice.'

Including broker non-votes in the pool is 'very distressing from a logical point of view,' says Smith. 'I can't understand how, if a broker didn't give instructions on how to vote, you would include broker non-votes, except for getting a quorum or for routine matters.'

As of April 15, when he spoke to Corporate Secretary, Smith had not heard from Occidental, but he says he expects a response for the record. Even if under Delaware law – where Occidental is incorporated – it is on strong legal ground, Smith believes bylaw changes must be addressed from a governance standpoint. Occidental is one of only 36 companies in the S&P 500 and Russell 1000 indices that count broker non-votes in their proxy tallies for shareholder proposals, according to GMI's study. Nine of those companies are incorporated in Ohio, where the state law default includes broker non-votes. But Occidental is among the 26 companies incorporated in states whose state law default does not include counting broker non-votes. Smith included the GMI report as an attachment to his letter to Occidental.

For its part, Investor Voice withdrew proposals filed at Intel and McDonalds, after getting promises from both companies to have 'serious discussions with their governance committees', during which they said they will evaluate their voting practices.

If companies are serious about engaging with shareholders and not just paying lip service to this growing trend, their methodology for counting support for shareholder proposals should reflect that. If not, investors are right to question their commitment to meaningful engagement.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary